Posted on by Phil

“Plain Vanilla” Angel Structure

It’s the middle of internet week!  I’ve already seen 30+ demos, in addition to Meetup Co-Founder Scott Heiferman smashing an iPad on stage at the tech meetup last night (which was at NYU’ Skirball center).  One theme that has been recurrent is that people are unaware of the structure of angel investments.  So, I thought I’d give a brief overview of one common structure.  Please note there is an excel file you can download at the bottom of the post.  It includes detailed notes and may be helpful to have open as you go through the post.

Many seed stage internet businesses look to angels to help them kickstart their companies through growth capital, as well as expertise.  It seems that many people are confused as to what a typical angel investment might “cost” them in equity.  And, while “a convertible note with a 10% PIK and a 25% discount to the series A” (also known as the “plain vanilla” angel structure) may make sense to some people, I thought I’d break down how to interpret that in case there were any non finance geeks out there who were trying to understand what the terms of an angel investment actually mean.

The Basics

I think it’s easiest to use an example to explain this type of investment.  So, Joe is the founder of Newco which is a website that does some sort of location/game based virtual good (insert other buzz words) service.  Joe needs to raise $500,000 to hire a few developers and a sales person.  Joe finds an angel investor who just happens to have a lot of experience in location/game based virtual good services.  Joe’s investor, let’s call her Ms. Jenna, gives him $500,000 and they use the plain vanilla (read typical) angel structure.

Instead of putting a value on the company now, the investor, will get equity based off of the valuation used in Joe’s Series A round of financing (more on that later).  Presumably, when Joe raises his Series A, he will have a few customers, some revenues, and a much better picture for how his company will actually operate.  His company will therefore be more easily valued.

The PIK

PIK stands for paid in kind.  Ms. Jenna is putting up $500,000, and expects Joe to pay her 10% in interest each year.  But, Joe doesn’t have any cash as he is a pre-revenue startup.  So, instead of paying in cash, Joe is going to take the value of the dollars he would pay Ms. Jenna, and add that to the principal of the investment.

In our example, in the first year, Joe will take the 10% interest payment (worth $500,000 x 10% = $50,000) and add that to the principal of the investment, which will now be $500,000 + $50,000 = $550,000.  In the next year, Joe will be charged 10% on that new principal.  His new interest payment is $550,000 x 10% = $55,000.  And his new principal amount is $550,000 + $55,000 = $605,000.  For those familiar, this is the same concept as a negatively amortizing loan.  Instead of paying interest in cash, it is paid as principal, which is the same as saying it is paid in kind (PIK).

The Equity Part of the Equation

We are going to pretend that Joe had a rough go of it and doesn’t raise his series A for 5 years.  In year 5, the principal value of Ms. Jenna’s investment is now $805,225 (please see attached excel to see the calculations, rows 19 and 20 – we just added the 10% interest in each of the 5 years).  The series A investor gives Joe $1 million dollars at a $4 million post-money valuation meaning that they will get $1 mm/$4 mm = 25% of Newco’s equity.  For the difference in pre vs post money valuations, please see the attached excel cell C14.

We said that the angel investment would be invested at a 25% discount to the series A.  This means that instead of investing at a $4 million valuation, Ms. Jenna’s dollars get put to work at a $4,000,000 x (1-25%) = $3 million valuation.  And, her $500,000 originally invested has grown to $805,225 due to the interest which has been paid in kind.  So, her ownership in the company will be $805,225/$3,000,000 = 27%.

At the risk of complicating things, it is worth noting that Ms. Jenna’s original angel investment can also come with a valuation cap, meaning that there is a maximum value that her dollars can be put to work at.  In the excel, I have put this at $10,000,000 so it doesn’t come into play.  But, if Joe’s company was worth $20,000,000 in 5 years when he raised his series A, Ms. Jenna’s equity would be calculated using a valuation of $10,000,000, not the typical 25% discount we have used in our example.  You can see how this benefits the angel investor in the case that they company does take off.  Ms. Jenna will invest her money at a $10,000,000 valuation as opposed to a $ 15,000,000 valuation ($20,000,000 x (1-25%) = $15,000,000)  which would give her a larger equity stake in the company.

End Result

Joe has now raised $1.5 million and is hopefully well on his way to a successful career at the helm of Newco.  He has given up 25% to his series A investors, and 27% to his angel investor Ms. Jenna, and so retains 48% for himself and the rest of his team.

The attached excel sheet has all of these calculations and is set up in a way that you can play around with different assumptions.  Please feel free to email me with any questions! phil (at) philstrazzulla (dot) com.  Also, please note that this is meant to be an overview of one type of common angel structure and that there are definitely more out there.   Enjoy!

The Excel: Angel Investing Basics

7,477 Replies to ““Plain Vanilla” Angel Structure”

  3. We are a group of volunteers and starting a brand new scheme in our community.

    Your web site offered us with useful information to
    work on. You have performed a formidable job and our entire neighborhood can be grateful to
    you.

  4. My time and experience here, although hindered by the virus lockdown, was an absolute joy.

    The Management, therapists, and support staff were incredibly caring and knowledgeable.
    I leave feeling stronger, more prepared, and that I have been lovingly looked after and helped
    on my way. Thank you once again.

  5. I’m pretty pleased to discover this web site. I need to to thank you for your time for this particularly wonderful read!!
    I definitely savored every part of it and I have you
    book marked to see new stuff in your site.

  11. Hi! This post could not be written any better!
    Reading through this post reminds me of my previous room mate!
    He always kept talking about this. I will forward this post to him.
    Fairly certain he will have a good read. Thanks for sharing!

  15. Thank you for every other informative website.
    The place else may I get that kind of info written in such
    an ideal method? I’ve a undertaking that I am simply now working on, and
    I have been on the glance out for such info.

    Have a look at my web-site: Outsource SEO

  16. Wonderful article! That is the kind of information that should be shared across the net.

    Disgrace on Google for not positioning this submit higher! Come on over and visit my web site .

    Thank you =)

  20. This design is steller! You obviously know how to keep a reader amused.

    Between your wit and your videos, I was almost moved to start my own blog (well, almost…HaHa!) Excellent job.
    I really loved what you had to say, and more than that, how you presented it.
    Too cool!

  22. Hurrah! In the end I got a web site from where I can genuinely take valuable information regarding my study and knowledge.

    Check out my blog post – buy

  24. I blog often and I genuinely appreciate your content.
    This article has truly peaked my interest. I will book
    mark your blog and keep checking for new information about once per week.
    I opted in for your Feed too.

  25. Excellent goods from you, man. I have be aware your stuff previous to and you’re just
    too excellent. I actually like what you have
    got here, certainly like what you are stating and the best way during which you assert it.
    You are making it entertaining and you still take care of
    to stay it wise. I can’t wait to read much more from you.
    This is really a tremendous web site.

  26. I’ll immediately seize your rss feed as I can not in finding your e-mail subscription link or newsletter service.
    Do you have any? Kindly allow me know in order that
    I could subscribe. Thanks.

  27. Wonderful work! That is the type of info that are meant to
    be shared across the web. Shame on the search engines for not positioning this publish
    higher! Come on over and talk over with my web site .
    Thank you =)

  29. Hello, i think that i saw you visited my weblog so i came to “return the favor”.I
    am trying to find things to improve myy site!I suppose its ok
    to use a few of your ideas!!
    homepage

  31. When I originally commented I clicked the “Notify me when new comments are added” checkbox and
    now each time a comment is added I get three e-mails with the same comment.
    Is there any way you can remove me from that service?
    Many thanks!

  32. Greetings from Carolina! I’m bored to death at work so I decided to browse your blog on my iphone during lunch break.
    I enjoy the knowledge you provide here and can’t wait to take a look
    when I get home. I’m shocked at how fast your blog loaded on my mobile ..

    I’m not even using WIFI, just 3G .. Anyhow, fantastic
    blog!

    Feel free to visit my page poker pulsa

  34. Hmm it appears like your blog ate my first comment (it was extremely long) so I guess I’ll just sum it up what
    I had written and say, I’m thoroughly enjoying your blog.
    I too am an aspiring blog blogger but I’m still new to everything.
    Do you have any tips and hints for rookie blog writers?
    I’d really appreciate it.

  35. I think that is among the so much significant information for me.
    And i’m satisfied studying your article. But want to remark on few normal things, The website taste is ideal, the articles is really
    excellent : D. Excellent job, cheers

    Check out my web page – livebanteng.com

  38. I have been browsing online more than 2 hours today, yet
    I never found any interesting article like yours.
    It’s pretty worth enough for me. Personally, if all website owners and
    bloggers made good content as you did, the web will
    be a lot more useful than ever before.

  43. I would like too thank you for the efforts you’ve put in penning this blog.
    I’m hoping to view the same high-grade blog posts by you in the future as well.
    In truth, your creative writing abilities has inspired me to get my very
    own blog now 😉
    web page

  45. Simply desire to say your article is as surprising.

    The clarity to your post is simply great and i can think you are an expert on this subject.
    Fine with your permission let me to clutch your RSS feed to stay
    up to date with approaching post. Thanks a million and please keep
    up the rewarding work.

Comments are closed.